Invest vs Pay Down Your Mortgage

This is one of the most common questions we get from clients with extra cash flow at renewal. There's a clean textbook answer and a messier real-world answer, and we think you deserve both before deciding.

Pay-down = guaranteed return

Every extra dollar you put against your mortgage saves you whatever your mortgage rate is, after tax. If your rate is 5.5%, that's a guaranteed 5.5% return — risk-free, no volatility, no market timing. In a world of GICs paying 4% and bonds paying 3.5%, that's a remarkably strong number. The catch is the money is gone — locked in the walls of the house until you sell or refinance.

Investing = expected return with variance

The long-run S&P 500 average is around 7% real after inflation, roughly 9-10% nominal. That's the number every financial planner uses. But it's an average over decades — any given year can swing from up 30% to down 30%. If you happen to start investing right before a market drawdown, the first three years can look ugly even if the twenty-year picture works out.

Risk-adjusted comparison

Over a 15+ year horizon, equities have historically beaten a 5-6% mortgage rate the majority of the time — but not every time. Over shorter horizons (under 10 years) the variance is wide enough that pay-down often comes out ahead on a risk-adjusted basis. The longer your horizon, the more investing tilts in your favour. The shorter your horizon, the more pay-down looks attractive because there's no time to recover from a bad market run.

Tax wrapper matters a lot

TFSA returns are 100% tax-free — every dollar of growth is yours. That tilts the comparison strongly in favour of investing if you have TFSA room. Non-registered investing is the opposite story: dividends and capital gains get taxed at your marginal rate (capital gains at half), which eats into the return. For non-registered money at a high marginal tax bracket, the math often favours mortgage pay-down. RRSP sits in the middle — you get the deduction up front, but pay tax on withdrawal.

Liquidity matters

Money in your TFSA you can pull out next week if you need it. Money locked into mortgage equity requires you to refinance (legal fees, appraisal, lender approval) or sell. If there's any chance you'll need access to that cash in the next five years — job change, family event, business opportunity — keeping it liquid in a TFSA has a real, non-mathematical value the spreadsheet doesn't capture.

The blended approach

Most of the planners we work with land on the same answer: pay enough extra against the mortgage to clear it by your target retirement age, and invest everything beyond that. It splits the difference — you guarantee you'll own your home outright when you retire, while still getting market exposure on the rest of the surplus.

When pay-down clearly wins

High mortgage rate (over 6%). Short horizon (under 10 years until you need the money or retire). No TFSA or RRSP room left, so any investing would be in a fully-taxed account. Or — and this is honest — you know yourself well enough to know that an extra $80,000 in a brokerage account will get touched, while $80,000 of mortgage paydown won't.

When investing clearly wins

Low mortgage rate (under 4%). Long horizon (15+ years). Full TFSA and RRSP room available, so growth compounds tax-free or tax-deferred. And the discipline to leave the account alone when markets drop 25% in a year — because they will, at some point, and that's when the long-run number actually gets earned.